Amendments to China Anti-Monopoly Law 4 key themes

China's Anti-Monopoly Law (AML) has been amended for the first time since it came into force in 2008.  

The amendments are significant and will impact businesses.  They can be grouped into, and characterised by, the following four themes: 

(1) Greater discretion on mergers
(2) Clarifications on approaches to vertical arrangements
(3) Focus on the digital economy
(4) Increased penalties

The amended AML will come into force on 1 August 2022.  

What you need to know

• Notable changes to the Anti-Monopoly Law (AML) include the following: 
  • The State Administration for Market Regulation (SAMR) will have the ability to "stop the clock" or suspend the merger review process in specified circumstances.  It will also have the express ability to investigate and enforce against mergers which do not exceed the notification thresholds but nevertheless have the effect or likely effect of eliminating and restricting competition in China.
  • Resale price maintenance will continue to be per se illegal prohibited in principle, unless undertakings are able to prove that this conduct did not result in anticompetitive effects. 
  • A safe harbour provision (based on market shares) will be introduced to exempt certain vertical arrangements.
  • There are new provisions within the AML which address and target conduct undertaken by large technology companies (including digital platforms).
  • Penalties for breaches of the AML have significantly increased.  Financial penalties may now be levied against individuals who participate in monopoly agreements.

• Going forward, the SAMR will be updating the relevant rules and regulations to take into account the amendments to the law.  These amended rules and regulations will set out further guidance as to the implementation of the new and amended AML clauses.

What you need to do

• Businesses should review their policies and strategies to ensure compliance with the amended AML.  
• Businesses should also watch out for the amended rules and regulations which accompany the AML - as these are expected to be instructive as to the application of the new and amended AML clauses.

Background 

On 24 June 2022, the Standing Committee of the National People's Congress of China adopted amendments to China's Anti-Monopoly Law (AML).  The amended AML will come into force on 1 August 2022.  This is the first set of amendments to the AML since it first came into force in 2008.  The amendments are significant and will impact on businesses.

This alert outlines the salient changes to the AML and implications for businesses.  The changes can be grouped into the following 4 key themes: 

(1) Greater discretion on mergers

(2) Clarifications on approaches to vertical arrangements

(3) Focus on the digital economy

(4) Increased penalties

1. Greater discretion on mergers

The amendments concerning merger control afford more discretion to the SAMR throughout the merger review process, and address perceived "loopholes" in the current merger regime.

The key amendments to the AML relevant to merger control include: 

Article 26

The SAMR will initiate investigations into transactions which do not exceed merger notification thresholds but nevertheless have or could have the effect of eliminating or restricting competition.

This amendment is aimed at capturing "killer acquisitions" where an incumbent (ie, particularly in the digital industry) acquires an innovative target solely to pre-empt future competition.

This amendment will be further bolstered by proposed changes to notification thresholds.  The Draft Rules contain the following amended and new thresholds:

• the combined worldwide turnover threshold will be increased from RMB 10 billion (c. USD 1.49 billion) to RMB 12 billion (c. USD 1.79 billion); the combined China turnover threshold will be increased from RMB 2 billion (c. USD 299 million) to RMB 4 billion (c. USD 598 million); and the China turnover test applicable to one party alone will be increased from RMB 400 million (c. USD 59.8 million) to RMB 800 million (c. USD 119.6 million) (primary thresholds); 
• If the thresholds above have not been exceeded, transacting parties would need to check if the following supplementary thresholds have been exceeded before coming to a conclusion as to whether a notification is required:
  • one party with China turnover exceeding RMB 100 billion (c. USD 14.9 billion); and another party (either the merging party or target) with either: (a) market value or valuation of RMB 800 million (c. USD 119.6 million) or above; and (b) more than 1/3 of worldwide turnover generated from China.

The proposed increase in primary thresholds is aimed at capturing transactions with greater impact in China and decreasing transaction costs for small to medium undertakings.  The new supplementary thresholds are aimed at capturing killer acquisitions.

Article 32

A "stop the clock" regime will be introduced.  The SAMR will have the power to suspend the merger review in the following circumstances: (i) where undertakings fail to provide necessary information or documentation; (ii) where new material facts which affect the review of the concentration need to be examined; and/or (iii) where conditions to be placed on the proposed concentration need to be further evaluated and a relevant undertaking makes a request for suspension. 

This amendment will afford the SAMR more time and flexibility to review mergers, particularly complex ones.  Prior to the amendment, the maximum period for review of complex mergers is 180 calendar days.  In practice, the SAMR extends review periods by requesting that transacting parties "pull and refile".  With this amendment, we might see less “pull and refile” requests.  Of note is the fact that the amended AML does not contain a maximum length of time in which the merger review can be suspended.

Article 37

The SAMR will improve its "classification" and "grading systems" for mergers.  Critical areas of focus would include industries concerning "national development and livelihood".

It is expected that the SAMR will focus on and prioritise reviews of transactions in specific sectors.  In a previous iteration of the amended AML, this provision highlighted the following industries: "livelihood, finance, science, technology and media". 

Article 58

Previously, fines were capped at RMB 500,000 (c. USD 75,000) for unreported mergers.  This has been increased to: (a) up to RMB 5 million (c. USD 747,000) for unreported mergers which do not result in competition concerns; and (b) up to 10% of turnover for unreported mergers which would result in competition concerns.

If, however, the SAMR considers the unreported merger to be a "serious violation", it would have the power to impose fines of between 2 to 5 times of the above penalties.

This large increase in failure to file penalties is likely aimed at unreported mergers with significant impact on Chinese markets as well as on recalcitrant and repeat offenders.

2. Clarifications on approaches to vertical arrangements 

Approaches to vertical arrangements have been clarified by the amendments.  More clarifications are required, especially with regards to how the new safe harbour regime will be implemented. 

Article 18

Resale price maintenance will continue to be prohibited in principle, unless undertakings are able to prove that this conduct did not result in anticompetitive effects.  

In addition, this article introduces a market share safe harbour in which vertical arrangements may be exempt.  It is not clear, however, how the market share safe harbour will be applied to resale price maintenance.

The Draft Rules state that the market share threshold is 15%. 

3. Focus on the digital economy

Provisions which target conduct undertaken by digital economy businesses (in particular digital platforms) have been introduced.  These additions are unsurprising given the focus of the Chinese Government on conduct in digital economy markets and the SAMR's recent enforcement actions against Chinese e-commerce platforms. 

The key amendments to the AML relevant to the digital economy include:

Article 1

The objectives of the AML now include "encouraging innovation".

This is a recognition of innovation as a key driver of competition in the Chinese and global economy.

Article 9

Undertakings shall not use data, algorithms, technology and capital advantages and platform rules to engage in monopolistic acts.

Article 22 

Undertakings with a dominant market position shall not use data, algorithms and platform rules to engage in an abuse of dominance. 

4. Increased penalties 

The amendments increase penalties for various contraventions of the AML (see table below attached).  Significantly, fines for individuals who are responsible for the conclusion of monopoly agreements have been introduced.  

Increased penalties for contravening conduct under the amended AML

Concluding remarks

Six implementing rules and regulations relevant to the AML²  will be updated to reflect and further clarify the amendments.  On 27 June 2022, the State Administration for Market Regulation (SAMR)  (China's antitrust enforcement agency) released draft amendments to these rules and regulations for consultation.  The consultation period concludes on 27 July 2022.

Going forward, it is important for businesses to review their policies and strategies to ensure compliance with the amended AML.  Businesses should also watch out for the final amendments to the Draft Rules as these are expected to be instructive as to the operation of the new and amended clauses of the AML.

Authors: Angie Ng (Partner, Ashurst); Guan Yue (Partner, Guantao); and Adelle Elhosni (Senior Associate, Ashurst). 

Special thanks also to Veronica Murdoch (Associate, Ashurst) for her contributions to this alert.

_{1. This includes the undertaking's legal representative, person in charge or directly responsible person.}

_{2. These are: (i) Regulations on the Merger Control Filing Thresholds; (ii) Provisions on Prohibition of Monopoly Agreements; (iii) Provisions on Prohibition of Abuse of Dominance; (iv) Provisions on the elimination and restriction of competition through the abuse of Intellectual Property Rights; (v) Provisions on the elimination and restriction of competition through abuse of administrative power; and (vi) Provisions on Merger Control Review.}